“Am I a sole proprietor or independent contractor?” You may be wondering how exactly you and your business are classified. The line can be blurry when determining whether you are a sole proprietor or independent contractor, but the two have one important distinction: The way income is received and taxed. In fact, it’s possible to be both a sole proprietor and independent contractor at the same time. Let’s talk about the ways the two differ.
Sole proprietor or independent contractor?
A sole proprietor is a one-person business that is not registered with the state it operates in as a business entity (corporation, LLC, LLP, partnership, etc.). Sole proprietors are usually not required to be registered; if you’re doing business as a one-person operation and are tracking the business income and expenses separately from your personal expenses and other income, you’re a sole proprietor.
An independent contractor is a person who does contract work for existing companies not as an employee, but independently under contract. Independent contractors receive 1099 MISC forms for income tax purposes rather than W-2s, like employees receive. No payroll taxes are taken from an independent contractor’s income – instead, they must pay self-employment taxes themselves along with income taxes.
You may be a sole proprietor and independent contractor
In some cases, it’s possible to be both a sole proprietor and independent contractor. The two are not mutually exclusive. Not all sole proprietors earn income from contracts; therefore, not all sole proprietors are independent contractors. Not all independent contractors earn income from business outside of contracts or operate on a solo basis; therefore, not all independent contractors are sole proprietors.
You can be both a sole proprietor and independent contractor if:
- You are self-employed
- You track business income and expenses
- File income taxes using Schedule C
- Pay self-employment taxes
- Do 1099 contract work with existing businesses
- Receive other business income from sales
Both tally up all business income – contract or otherwise – at the end of the fiscal year when calculating the company’s income taxes. If you have nothing but 1099 contract work as an income source, you are simply an independent contractor. If you work alone and have both business income (from sales, advertising, etc.) and contract income, you are both a sole proprietor and independent contractor.
Whether you’re a sole proprietor or independent contractor, you’re a self-employed business owner who will be responsible for paying self-employment taxes at the end of the fiscal year. Prepare for this eventuality by making quarterly tax payments and ensure you keep flawless records of your income and expenses.